By Ambrose Evans-Pritchard

LONDON, England - December 12, 2010 - The EU’s Franco-German "Directoire" and the European Central Bank have between them ruled out all plausible solutions to the eurozone’s debt crisis.

There will be no Eurobond, no increases in the EU’s 440 billion euro rescue fund, and no mass purchases of Spanish and Italian bonds by the European Central Bank. Nothing. The system is politically and constitutionally paralyzed. Spain and Portugal will be left nakedly exposed before their funding crunch in January.

It is entirely predictable that Angela Merkel and Nicolas Sarkozy would move so quickly to shoot down last week’s Eurobond proposal, issuing a preemptive warning before this week’s EU summit that they will not accept “a bundling together of all Europe’s debts”.

How can Germany or France agree lightly to plans that amount to an EU debt union, with a common treasury, tax system, and budget policy; the stuff of civil wars and revolutions over the ages? To do so is to dismantle the ancient nation states of Europe in all but name.

Even if Chancellor Merkel wished to take this course - and even if the Bundestag approved it - the scheme would still be torn to pieces by the German constitutional court unless legitimized by radical EU treaty changes, which would in turn take years, require referenda, and face populist revolt in half of Europe.

What the German people are being asked to do is to surrender fiscal sovereignty and pay open-ended transfers to southern Europe, taking on a burden up to six times that of reunification with East Germany.

“If we pool the debts of the countries in the southwest periphery of Europe, we are blighting our children’s future: the debt levels are astronomical,” said Hans-Werner Sinn, head of Germany IFO institute.

Any attempt to prop up the status quo will cement the current account imbalances of EMU’s North and South, to the detriment of both sides.

“I doubt that the current leaders of Europe fully understand the economic implications of their decisions. They are repeating the mistakes that Germany made over reunification,” Sinn told the Handelsblatt.